California Appeals Court Finds No Coverage Where Allegedly Defective Parts Were Incorporated Into a Whole Construction Project

July 31, 2014 | Insurance Coverage

A California appellate court, affirming a trial court’s decision, has ruled that there was no coverage under a commercial general liability insurance policy for claims against a subcontractor that incorporated allegedly defective materials into a construction project, where the only damage was to the project itself.

The Case

Regional Steel Corporation subcontracted with JSM Florentine, LLC, to provide reinforcing steel for the construction of an apartment building in North Hollywood, California. Toward that end, Regional prepared and submitted shop drawings that used both 90-degree and 135-degree seismic tie hooks in shear walls. After JSM and the structural engineer for the project approved the drawings, Regional began construction, using both the 90-degree and 135-degree seismic hooks.

A city building inspector issued a correction notice requiring the exclusive use of 135-degree hooks. Thereafter, JSM refused to pay Regional’s invoices and withheld $545,000.

Regional sued JSM, and JSM filed a cross-complaint. Regional tendered the defense of JSM’s cross-complaint to its insurance carrier. The insurer declined coverage, contending that the tie hook problem did not constitute property damage within the meaning of the policy.

The trial court found that the insurer had no duty to defend Regional, and it appealed.

The Appellate Court’s Decision

The appellate court affirmed.

In its decision, the appellate court found that the 90-degree tie hooks did not constitute property damage under Regional’s insurance policy.

The appellate court acknowledged that some cases have found that the incorporation of hazardous materials into a whole construction project might constitute property damage within the meaning of a commercial general liability insurance policy, but it declared that California cases have “consistently” held that coverage did not exist for incorporation of defective materials into a whole construction project where the only property “damage” was the defective construction, and damage to other property had not occurred.  Claims for demolition and repair associated with getting to and removing the 90-degree tie hooks were likewise not covered.

Accordingly, the appellate court concluded, there was no coverage for Regional’s use of the 90-degree tie hooks.

The case is Regional Steel Corp. v. Liberty Surplus Ins. Corp., 226 Cal. App. 4th 1377 (Cal. Ct. App. 2014).

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